ASIC has noted a decision by the Federal Court of Australia to allow insolvency practitioners to ‘fix’ remuneration prospectively (i.e. ahead of the work being performed) provided it is based on a formula where the amount of remuneration can be determined definitely.
Insolvency practitioners must have the amount of their remuneration ‘fixed’ or ‘determined’ by creditors or a court.
In what was regarded as a ‘test case’, the Court was asked to resolve uncertainty around whether the remuneration of an administrator could properly be fixed at a meeting of creditors by reference to a scale of hourly rates, subject to a monetary cap.
Justice Gyles found that remuneration could be fixed prospectively by reference to a formula based upon the number of hours worked by the administrator and the administrator’s staff and a scale of rates for each category of person working on the administration. A monetary cap is relevant for determining if the remuneration is reasonable.
Mr Paul William Gidley, the administrator of Aliance Motor Body Pty Limited, commenced the test case, with the support of the Insolvency Practitioners Association of Australia (IPAA). ASIC appeared by leave as amicus curiae (a friend of the Court) in order to assist the Court by making submissions as a contradictor.
The decision will be used by ASIC in the preparation of a guide for insolvency practitioners seeking to fix their remuneration.
Background
Mr Paul William Gidley and Stewart William Free of Lawler Partners were appointed as joint and several voluntary administrators (the administrators) of Aliance Motor Body Pty Ltd.
At a second meeting of creditors convened by the administrators on 15 July 2005, the creditors resolved that the company should execute a Deed of Company Arrangement (DOCA) with Mr Gidley as Deed Administrator (Deed Administrator).
At the same meeting, the creditors passed three resolutions dealing with the remuneration of the administrators and the deed administrator.
The principal issues in the case concerned two of those resolutions, which prospectively set the remuneration to be paid to the administrators pending the commencement of the DOCA and the remuneration of the deed administrator.
In both cases, the remuneration to be paid was capped and to be calculated on a time basis at hourly rates outlined in Lawler Partners guide to hourly rates.
ASIC argued that hourly rates cannot be applied prospectively and without reference to an assessment of the nature of the tasks, their difficulty and the appropriate allocation of staff employed by the insolvency practitioner.
The Court ruled that although there is the potential for abuse in fixing remuneration prospectively, this is no reason to preclude it as a means of fixing remuneration. The Court drew attention to the various ways in which creditors can challenge the remuneration sought to be fixed and paid to insolvency practitioners.